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2020 M&A Activity Unfazed by Pandemic; Will 2021 Be the Same?

Industry Trends and Research

Despite the economic disruptions caused by the COVID-19 pandemic, wealth management M&A activity logged the eighth straight record-setting year in 2020, according to a new industry report. 

ECHELON Partners’ 2020 RIA M&A Deal Report observes that the year’s 205 transactions in total is “particularly impressive” given the slowdown that occurred in the second quarter, when the number of deals hit a four-year low (35) for a single quarter. In contrast, dealmaking activity reached new quarterly highs in the third (55) and fourth (69) quarters. Overall, 2020 represented a roughly 1% increase over the 203 deals recorded in 2019, which was the previous record.

“This is an incredible accomplishment given the record levels of market volatility experienced earlier in the year and it sits against the backdrop of a pandemic-induced global economic slowdown that caused M&A activities in many other industries to come to a halt,” ECHELON emphasizes.  

In addition to the record-breaking deal activity, the report notes that there were 78 acquisitions of firms with $1 billion-plus in assets under management—the most in a single year. In total, $318 billion in assets were acquired last year, with the average seller holding $1.8 billion. Both were record levels, as buyers and sellers exhibited new levels of size and sophistication, according to the report.  

Breakaway Activity

Overall, the number of RIA breakaways declined by nearly 20% from 2019—which was a record year for breakaway activity. That said, the 2020 activity levels remained “healthy and consistent” with 2018 levels, but a notable trend developed that ECHELON believes will continue. The firm observes that there were 33 teams with more than $1 billion in assets that transitioned to the RIA channel in 2020, a new record for a single year. 

“Like the growing number of $1 BN firms that sold in 2020, this development underscores the sophistication of breakaways and their interest in partners that can provide resources to accelerate growth, improve operational efficiencies, deliver improved client experiences, and reward operators with equity,” the report states. 

Retirement Transactions

ECHELON believes that the convergence of wealth management and retirement plan advice that was a notable theme emerging over the course of 2020 will continue to be a driving force behind M&A activity in 2021.

While there were only seven transactions that involved retirement plan advisors with greater than $100 million in assets and/or retirement platforms, they were responsible for 3 of the 10 largest deals last year, with a total of $257 billion in combined AUM, the report notes. The firm further observes that advisory firms that specialize in servicing defined contribution plans typically have significantly lower margins than traditional wealth managers, which often have profit margins of roughly 25%.

“As fee compression and regulatory and compliance pressures have further squeezed the margins of retirement plan advisors, more of these firms have become acquired by aggregators such as CAPTRUST, Sageview, and GRP—companies that can help create economies of scale and improved margins through centralized support and operations,” the report explains. 

Additionally, many of these larger firms are also actively in the process of acquiring wealth management firms to improve their margins and expand their services. According to the report, this will provide an opportunity for firms to develop a new base of wealth management clients by leveraging their access to plan sponsors and plan participants.

The report observes that this convergence opportunity also motivated retirement plan recordkeepers and benefits providers, with Empower Retirement being the most opportunistic in 2020. “Its acquisition of Personal Capital now provides the firm with a technology platform and infrastructure that will allow the Denver-based company to differentiate its business from other record-keepers—while also providing Empower with the opportunity to introduce Personal Capital’s financial planning capabilities to its 13 million plan participants,” the report states. In fact, more than two million of those participants were added by the September acquisitions of MassMutual’s and Fifth Third’s retirement plan divisions.   

2021 Outlook

As for 2021 overall, ECHELON suggests that it’s likely to be another record year for deal activity. “Given the continued momentum and fundamental motivators that supported dealmaking throughout 2020, we strongly believe that 2021 has the potential to be another record year for M&A activity in the wealth management industry,” the firm says. ECHELON identifies five primary drivers of M&A that it believes will lead to increased activity in 2021:

  • a demographic tipping point, with many founders approaching retirement and seeking liquidity events;
  • increased interest from well-capitalized buyers;
  • increased availability of financing;
  • the convergence of wealth, asset management, retirement and technology; and
  • advisors attempting to factor in market cycles in timing their exit strategies.